Carlyle Group's acquisition of money manager TCW Group Inc. is getting mostly raves, and could be the first of several institutional money manager investments Carlyle makes.
Under the Aug. 9 deal, TCW's management and key employees' ownership will grow to 40% from 17%. Another plus: TCW executives expect all portfolio managers will stick around — albeit with lower overall compensation. There are 36 portfolio managers, including managers in TCW joint ventures.
The deal, financial terms of which were not disclosed, is expected to close in the first quarter of 2013.
For limited partners in the two Carlyle funds taking a 60% stake in TCW — the $1.1 billion Carlyle Global Financial Services Partners LP and the $13.7 billion U.S. buyout fund Carlyle Partners V — Carlyle is tapping in on the growing opportunity of investing in financial services companies.
Officials at CalSTRS, a client of both TCW and Carlyle, are pleased with the buyout.
“We think it's a good thing. We think the most positive aspect is the management ownership increases,” said Ricardo Duran, spokesman for the $150.6 billion California State Teachers' Retirement System, West Sacramento. “This gives them more skin in the game.” CalSTRS has a $500 million commitment to Carlyle Partners V and $270 million with TCW in a domestic small-cap growth equity strategy.
“We see no problem with (CalSTRS') portfolio because of this,” Mr. Duran said. “As an investor, we are seeing a positive impact on the private equity and public equity sides.”
The most important thing for private equity investors in general is that buyout teams — particularly Carlyle — are expert in owning financial services companies, said Dennis McCrary, partner and global head of co-investment in the San Francisco office of U.K. private equity firm Pantheon Ventures Ltd., which co-invests on deals and invests on the secondary market.
A buyout of a financial services firm is not your average private equity deal.
“Private equity firms that possess specific industry expertise and investment experience in the financial services sector will outperform and avoid pitfalls facing more generalist firms,” he said, adding Carlyle is one firm that has that expertise.
With a money manager, private equity firms need to know whether it can increase its assets under management.
“Succeeding in the investment management business ... requires a unique set of skills including marketing, client service and of course strong investment performance. Private equity firms need to understand the subtleties in these different businesses to buy wisely and optimize value,” Mr. McCrary said.
TCW had $131 billion in AUM as of July 31, up 10% from the first of the year, according to TCW. Most of its growth has been from its $43 billion in mutual fund assets, up 26% year to date. Most of TCW's assets are in fixed income, with $76.9 billion in domestic fixed income and $12.7 billion in international assets, which is mostly fixed income, compared with $20.5 billion in equities and $17.2 billion in alternative investments.